Q1 2022 East West Bancorp Inc Earnings Call
Good day and welcome to the East West Bancorp first quarter 2022 financial results Conference call.
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I'd now like to turn the conference over to Julian I believe go director of Investor Relations. Please go ahead.
Thank you Sarah good morning, and thank you everyone for joining us to review the financial results of East West Bancorp for the first quarter of 2022 with me on this conference call today are Dominic <unk>, our chairman and Chief Executive Officer, and Irene Oh, our Chief Financial Officer, we'd like to caution you that during the course of the call management may make projections or other forward.
Looking statements regarding events or future financial performance of the company within the meaning of the Safe Harbor provision of the private Securities Litigation Reform Act of 1995. These forward looking statements may differ materially from the actual results due to a number of risks and uncertainties for a more detailed description of risk factors that could affect the company's operating results. Please refer to our final.
So with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31 2021. In addition, some of the numbers referenced on this call pertain to adjusted numbers. Please refer to the bank's regulatory filings, including our form 8-K filed today for the reconciliation of GAAP to non-GAAP financial measures.
During the course of this call we will be referencing a slide deck that is available as part of the webcast and on the Investor Relations site. As a reminder, today's call is being recorded and will also be available in replay format on our Investor Relations website, I will now turn the call over to Dominic.
Thank you Julianna good morning, and thank you everyone for joining us for our earnings call I will begin the review of our financial results with slide three of our presentation.
This morning, we reported net income of 238 million and earnings per share of $1.66 for the first quarter of 2022.
Both up by 37% annualized from the fourth quarter of 2021.
The first quarter results were an excellent start to the year.
Highlights include record loans and deposits.
And the acceleration of both loan and revenue growth.
And expanding net interest income.
And positive operating leverage.
All of these factors drove pretax pre provision income growth of 28% linked quarter annualized.
And pretax pre provision profitability of two 1% in the first quarter.
We returned one 6% on average asset.
16, 5% on average equity.
And 18% on average tangible equity for the quarter.
All of our profitability ratios expanded.
Oh, Hi returns reflect our strong financial performance and.
And the strength of east West business model.
Our loan portfolio is well diversified between the major loan categories of commercial commercial real estate and residential mortgage.
Our deposit base spans consumer small business and corporate commercial accounts.
Looking forward.
With robust pipelines.
Asset quality.
And the balance sheet that is well positioned for rising interest rate environment.
We are confident in our ability to execute and deliver strong growth and earnings for the rest of the year.
Slide four presents a summary of our balance sheet.
As of March 31, 2022.
Total loans reached a record high of $43 5 billion, an increase of 17% annualized from December 31 2021.
Now, excluding paycheck protection program loans.
Total loans of $43 2 billion grew by 2 billion or 20% annualized.
Accordingly based on our current pipeline and year to date results. We are updating our loan growth outlook for the full year to a range of 13% to 15%.
Up from 12% previously.
Oh, all major loan portfolios grew this quarter with.
With the strongest growth from commercial loans, excluding PPP, followed by commercial real estate.
Total deposits reached a record high of 54 9 billion.
For the first 2022.
Up by $1 6 billion or 12% annualized from December 31, 2021.
Deposit growth this quarter was primary driven by noninterest bearing demand deposits, which grew to a record $24 9 billion and made up 45% of total deposits as of March 31, 2022 up.
Up from 43% from December 31.
Yeah.
Turning to slide five.
Quarter over quarter.
Our book value per share declined by two 5%.
Largely due to a negative change in the accumulated other comprehensive income.
This change reflected the impact of rising interest rates on investment securities evaluations.
And such fluctuations do not have an impact on our earnings.
Our regulatory capital ratios.
In the exhibit on this slide you can see our strong capital ratios.
As of March 31st 2022.
We had a common equity tier one ratio of 12, 6%.
Our total capital ratio of 13, 9% and a tangible common equity ratio of 825%, which provide us with meaningful capacity.
For future growth.
East West Board of Directors has declared a second quarter 2022 dividends for the company's common stock.
The quarterly common stock dividend of <unk> 40.
Is payable.
On May 16 2022.
To stockholders of record on May seven 2022.
Moving onto a discussion of our loan portfolio beginning with slide six.
C&I loans outstanding excluding PPP.
Were a record 14 5 billion as of March 31, 2022, an increase of 27% annualized.
From December 31 2021.
Total C&I commitments with 21 7 billion as of March 31st.
When Chile up by 19% annualized.
Our C&I loan utilization rate increased to 70% as of March 31st.
Up from 69%.
As of December 31st.
This is a first quarter over quarter increase in our utilization rates since the first quarter of 2020, when the pandemic began.
Overall first quarter C&I growth was well diversified across our lending teams geographies and specialized vehicles.
All of our C&I industry segments grew in the first quarter, except the oil and gas.
Going into the second quarter, we expect loan growth to be equally well diversified.
Slides seven and eight show the details of our commercial real estate portfolio.
Which is well diversified by geography and property type.
Consists of low loan to value loans.
Total commercial real estate loans was 17 billion as of March 31, 2022 up by 20% annualized from December 31st.
Growth was broad based and all of our commercial real estate segments by geography and by property type.
<unk> in the first quarter.
We saw strongest net growth and industrial commercial real estate and multifamily loans.
In slide nine.
We provide details regarding of our residential mortgage portfolio.
Which consists of single family mortgages and home equity lines of credit.
Residential mortgage loans were $11 6 billion as of March 31, 2022.
Growing by 11% annualized from December 31st.
During the first quarter, we originated $1 1 billion of residential mortgage loans. This.
This origination volume is up 9% quarter over quarter.
And unchanged year over year.
I will now turn the call over to Irene to a more detailed discussion of our asset quality and income statement.
Thank you Dominic.
Our asset quality metrics on slide 10, I'm pleased to report that basketball.
You need to be stronger in the first quarter.
At our current size loan ratio decreased by eight basis points sequentially 192 year loans held for investment criticized loans $833 million were essentially unchanged from December 31st quarter over quarter nonperforming assets decreased by 9% down to 94 million not the nonperforming asset.
<unk> improved by two basis points down to 15 basis points of total assets.
As of March.
On slide 11 presents the components of our allowance for loan losses, our allowance totaled 546 million as of March 31st a 126 loans. Excluding P. P. P comparable at 542 million or 132 as of December 31st quarter.
Quarter over quarter increase in the allowance reflects loan growth, whereas a decrease in the coverage ratio flat.
And improving forecast and improving asset quality.
Quarter over quarter net charge offs and.
Our 8 million down from $10 million in the fourth quarter. The first quarter net charge off ratio was eight basis points of average loans annualized an improvement of 10 basis points annualized for the fourth quarter.
During the first quarter, we recorded a provision for credit losses of 8 million compared to a reversal of 10 million for the fourth quarter and no provision in the prior year quarter.
And now moving on to discussion of our income statement on slide 12. This slide summarizes the key line items.
Which I'll discuss in more detail on the following slides.
Noninterest income as part of the interest rate contracts and other derivatives line item, a mark to market adjustments, which were a positive $7.6 million in the first quarter compared with 300000 in the fourth quarter of 2021. These primarily relate to favorable changes in the credit valuation adjustment or CVA on the.
Fly this E CVA Mark.
The other line item of noninterest income.
Amortization of tax credit and other investments in the first quarter was $14 million compared with $32 million.
Fourth quarter quarter over quarter variability in the amortization of tax credits, partially reflects the impact of the investment that closed in a given period.
The effective tax rate for the first quarter of 2022 was 20% compared to 21% for the fourth quarter. We currently expect that the 2022 full year effective tax rate will be in the range of 18% to 19% the poorly adaptor tax rates on a go forward basis.
Well decline as more tax credit investments closed and projects go into service.
Responded late the tax credit amortization expense will increase over the course of the year for the second quarter of 2022. We currently expect to book a tax credit amortization expense of approximately $37 million.
I'll now review the key drivers of our net interest income and net interest margin.
Starting on slide 13 through 16, and we'll start with average balance sheet first quarter average loans of $42 1 billion. Excluding PPP grew by $1 8 billion or 19% annualized the strong number across all asset categories drove a favorable mix shift in average earning.
Assets quarter over quarter, and the first quarter average loans made up 72% of average earning assets compared with 69% in the prior quarter.
First quarter average growth posit world of.
First quarter average deposits of 54 billion declined by $291 million or 2% linked quarter annualized primarily due to a decrease in noninterest bearing demand deposits, partially offset by increases in average interest bearing checking and savings deposits.
And that deposits made up 43% of our average deposits in the first quarter compared with 44% in the fourth quarter and 38 in the year ago quarter.
Turning to slide 14 first quarter 2022 net interest.
416 million was the highest quarterly net interest income in the history of east west growing by 10% linked quarter annualized excluding PPP.
Net interest income grew by 15% annualized in the first quarter income related to PPP loans was $5 million.
The GAAP net interest margin of 287 expanded by 14 basis points quarter over quarter as you can see from the waterfall chart on this slide the net interest margin expansion in the fourth quarter was driven by strong loan loss, which resulted in a favorable earning asset mix shift as well as higher.
Yields on loans and other earning assets.
Turning to slide 15, the first quarter average loan yield was 363, an increase of four basis points quarter over quarter. The average loan yield comprised an average coupon yield of $3 48.
Plus yield adjustments, which contributed 15 basis points of the overall loan yield in the first quarter as of March 31st the spot coupon rate on our total loans were $3 55.
The positive impact of rising interest rates on our portfolio will be more evident in the second quarter, our average loan yields as 33% of our loans are linked to the prime rate, which did not increase until mid March.
In this slide we also presented the coupon spot rates for each major loan portfolio for the last three quarter and periods.
65% or 28 billion of our loan portfolio is variable rate and most of these loans will be repricing on a monthly basis.
Also note that all of our 28 billion in variable rate loans, $3 1 billion and fully indexed rates below Florida as of March 31st of which $1 7 billion or 50 basis points or less from their floors and another 700 million billion 700 million excuse me or 52.
100 basis points from their floor rate.
Turning to slide 16, our average cost of deposits for the first quarter was 10 basis points unchanged from the fourth quarter. The spot rate on total deposits was 11 basis points as of March 31st Ah by two basis points about December 31st we are starting a rising interest rate cycle from a position of strength.
With record levels of demand deposits for east West Bank strong liquidity loan to deposit ratio of under 80%.
Turning to slide 917, total noninterest income in the first quarter was 80 million up from $71 5 million.
Fourth quarter customer driven fee income and net gains on sales of loans were 65 million, an increase of 3% linked quarter or 11% annualized.
Customer driven interest rate contract revenue increase.
Improved customer demand as interest rates rise, while management fees net gains on sales of SBA loan and deposit account fees also increased quarter over quarter.
Moving on to Slide 18 first quarter noninterest expense was 189 million.
Excluding amortization of tax credits and core deposit intangible amortization adjusted noninterest expense was 175 million in the first quarter down 3 million, one 5% sequentially during the quarter decreases in legal expense and overall operating expenses more than offset.
Increased competition compensation and employee benefits, which is typically seasonally higher in the first quarter due to higher payroll taxes and related expenses.
The first quarter adjusted efficiency ratio was 35% compared with 37% in the fourth quarter and 39% in the year ago quarter and with that I'll now review our updated outlook for the full year of 2022 on slide 19.
For the full year of 2022 compared to our full year 2021 actual results. We currently expect year over year loan growth, excluding PPP of approximately 13% to 15% reflecting year to date performance current pipe loan pipelines, which are very robust are updated.
This outlook is an increase from our previous outlook of 12% loan growth.
Year over year net interest income growth, excluding P. P P and the range of 22% to 24%.
This is an increase from our previous outlook of net interest income growth of 17% to 19% our updated outlook reflects lumber as well as the impact of anticipated fed funds rate increases on our asset sensitive balance sheet underpinning our interest income assumption is a board into.
Just rate curve as of March 31st 2022, with fed funds expected to reach to 50 by year end.
Adjusted noninterest expense, excluding tax credit amortization of 8% year over year, which narrows, our previous outlook of expense growth in the range of 7% to 8% as our revenue grows from rising interest rates, we expect to reinvest a portion back into our business investing in people and technology to support our strategic.
Initiatives, we expect our revenue and expense outlook to result.
Positive operating leverage year over year.
In terms of credit items for 2022, we currently expect that the provision for credit losses will be in the range of 50 to 60 million. This was higher compared with our previous outlook, which was a provision for credit losses under our $50 million, we continue to anticipate a modest year over year improvement.
And the full year net charge off ratio, which was 13 basis points of average loans in 2021.
We now expect that the full year 2022 effective tax rate will be approximately 18% to 19%. This is higher compared with our previous outlook, which was for an effective tax rate of 17% to 18%. Our outlook includes the impact of tax credit investments and also factors in the <unk>.
Kris income, we now expect there will be quarterly variability in the tax rate due to timing of tax credit investments placed into service with that I'll now turn the call back to dominant for closing remarks.
Thank you Irene.
Well in closing we are off to an excellent start for the year and look forward to delivering strong financial results for our shareholders in 2022.
Global volatility notwithstanding we are well positioned to navigate the current environment.
Our credit quality is strong.
Balance sheet is asset sensitive.
We have strong capital and ample liquidity to support growth.
Most importantly, our associates are focused on providing superior banking service to our customers.
I wish to thank them for their efforts and excellent results.
I will now open the call to questions operator.
Yeah.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
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Please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Ebrahim <unk> with Bank of America. Please go ahead.
Good morning.
Good morning.
Just a first means it sounds like youre fairly optimistic with the loan growth outlook.
After a year or a little more detail around just how borrower demand played out during the course of the quarter and have you seen incremental supply chain snags.
Impact from customer sentiment since the war began at the end of February well and just in terms of when you think about loan growth from here. If you could give us a sense of CRE C&I residential how do you think that mix playing out.
And.
In terms of the loan growth we are looking at our pipelines you know.
A lot of if I look at the the current pipelines no a lot of the.
Our C&I loans that we are working on you know what are some of the Pete private equity or entertainment technology.
And health care and other.
General manufacturing and consumer goods and so forth all of these business.
That would be working on with our clients. So it's all are in the process of trying to make it happen in the second quarter. So we feel pretty good about what's coming and then how to what extent that business will or will not be affected.
By the external environment, we feel pretty good about a lot of the deals in the pipeline, but it would not be.
Having much impact.
Impact by for example, just Russia, Ukraine Wall you know, it's it's it's a tragic from a humanitarian perspective, but there's hardly any bearing to our customers' business that.
That we're doing in dealing with.
And that's one for C&I for a commercial real estate is again you know we have you know.
Uh huh.
Clients that are in the midst of maybe closing deals that we're working with.
And so those are the deals that we feel pretty certain again in the second quarter would be closing same thing for the single family mortgages.
What's in our pipeline is something that we expect it to be funded it takes you know.
So in period of time to get loans funded so we feel pretty good about.
What we expect to be coming out in the second quarter, obviously the longer the horizon the harder for us to predict you know you ask us about what would your fourth quarter loan growth would be light well at this point.
We don't have as much visibility as we have for the second quarter, you know because second quarter, we see the numbers that we're working on it looks.
Very healthy and but how the let's say the third and fourth quarter would develop I think that extraordinary environment will have a lot to do with it and we'll see how it goes.
Got it and just one bigger picture question Dominic if I mean, there's a lot of chatter for a bank that has cross border presence insurance no. There isn't a fair amount of discussion on the globalization.
Potential further deterioration in U S. China relationship how do you handicap.
And protect the bank from a risk standpoint.
Factored that Sweden sentiment on the stock So would love to hear how you think about managing risk if you assign a relation before did deteriorate further.
Yeah.
Well Oh.
We don't necessary to protect the bank from these challenges we actually excel in these challenges you know east West has always done extra.
Extraordinary well whenever there is something that from a perception standpoint looks bad debt and in reality, we actually come out way ahead of all our peer banks, but let me just address your concern maybe one by one first and foremost I I've said it before you know our greater China.
Including China, and Hong Kong loan portfolio is only 5% of our total loans.
And 95% of our loans are domestic in the U S and that includes like commercial real estate.
That's S. Local so you can get because of real estate cannot move at AR, which is 39% of total loans and residential mortgage is 27% of our total loans. So our loan portfolio in China Hong Kong also.
It's very well diversified by industry, you know ranging from general manufacturing consumer goods technology, and attainment to digital media et cetera.
In our credit profile of these customers also was excellent with strong balance sheet and high level of liquidity across all of our portfolio loan portfolio.
So I would say that in both China and U S.
It all comes down diversification and granularity are the most important factor for us to manage the risk. So I feel pretty good about you look at so much about 95% about total loan portfolio.
Out of that base in U S.
Majority of them are new.
The residential or commercial real estate and then many of the domestic CNI loans, Some entertainment a private equity health care.
And digital media all domestic in nature, so the exposure.
From China is very minimal access to begin with and even within China that 5%.
Very very strong credit quality business and is also well diversified so from that perspective, we feel very very comfortable where we are today.
No, but going back to what I talked about we don't necessarily.
Looked at you know we need to protect from the U S China dynamic.
Dynamic we actually excel is that.
When we looked at the U S China scenario.
We actually always find opportunities.
When people shy away from it and the fact that you have seen what we have done in the last in.
And the last.
Four years in fact.
I was just shy of five and a half years now ever since you know that.
The beginning of the Trump administration.
That you.
USD clear trade war against China.
Yes.
There is clearly no disruption to the <unk>.
International trade per se, but east West, we're able to find niches and we continue to have.
Christine asset quality.
But we didn't take any losses.
Due to this sort of trade tariffs.
That went on for a few years.
And we continue to find ways to grow the business.
So I looked at it is that when you looked at where we are today.
And then we can reflect back on <unk>.
For the last 30 years I've been involved with East West Bank and the 1991.
So we double our size dwindle savings along quite a financial crisis.
At 92 2009.
Double our size during the global financial crisis.
Ah well today.
We weren't able to just double our size in one year.
But.
Since the Trump administration.
Startup.
Checking on that.
The rain and U S. In 2017 two today.
Double our size also but we doubled what took a little bit longer but with about outsized organically.
So all I'm trying to get at is that East West Bank always we'll find a way to grow our business.
And we have history to demonstrate that in 30 years and that's facts that's not rhetoric.
And the other thing I wanted to point out is that going back to your concern about deglobalization or maybe decoupling.
In U S and China, if you talk to the expert.
In the business.
From a by the way I'm talking about even political expert.
The U S trade representative Catherine tie.
Janet Yellen caused it.
Secretary of Treasury.
Romano Who's the secretary of Commerce, and each and every one of them have never ones.
<unk>.
I declare that U S wanted to decouple in fact, they all continuously highlight that.
Engagement.
But.
We do need to find a way to more effectively engage with China.
Those are the kind of words coming out from these.
So no expert in the area. There are other experts, obviously that you would see it from the media.
They talked about yes, U S. China, we need to decouple, and so forth and deglobalization, but those are the folks that are selling books and sell it military weapons. So really you are not the same liked.
I wonder, who actually need to run that business.
We at East West Bank Weird expert.
And in terms of managing.
Our book of business.
We understand U S China relationship.
Better than most everyone in the country when the risk management business. So we feel very confident about where we are today in terms of the credit quality and the potential risk of the U S, China, decoupling, which quite frankly.
Is extremely unlikely.
And.
In addition to that we.
We also feel that.
Besides the unlikelihood of decoupling the deglobalization in the world.
It's also extremely unlikely.
You talked about 40 years or so for the world to work together with China to create a supply chain infrastructure.
It's not that easy.
To globalize it.
In 510, or even 20 years and its something that once people really understand that.
The nuances and exactly what it would take to build this supply chain and they will understand that.
It's never going to be that easy to have this decoupling I think that U S. China would just have to continue to work through their differences and there are challenges in terms of philosophical differences that I use and so forth are they going to need to find a way to walk it through what we.
Noticed just recently.
<unk>.
China in fact that.
The peoples bank.
China and the state administration of foreign exchange on April 10th just issued twenty-three measures to help business impacted by the pandemic and six of those measure directly related easing.
Cross border trade in payments.
So those are kind of things that China has been working on trying to make sure. They can get the economy going also.
And every now and then when we see these kind of opportunities comes out those are opportunities that east West and also will be able to take advantage off and that's the.
The key things for us when it get down to the antisense.
We are.
A bank they have very unique value proposition, we understand that business and we have shown for many years and have proven for many years, we know how to navigate.
Through.
This U S. China relationship and continue to be able to have sustainable growth and we feel very confident that in the next many years will continue to be able to outperform our peer banks because of this unique value proposition.
Okay.
Our next question comes from Chris Mcgratty with <unk>. Please go ahead.
Hey, great. Thanks for the question.
Dominic or I mean, just wanted to dig into the guide a little bit.
Really good outlook.
I'm, having a little trouble getting to your net interest income I think it might my notes suggests it should be a little bit higher given the growth and the margin set up.
So I guess the question is.
What are the assumptions embedded for deposit growth deposit betas.
You know maybe the missing component is the size of the balance sheet, but it feels like the guidance.
It's awfully conservative.
Okay.
Glad to hear you say that.
We're very tired I wanted to start by saying, we're very positive on the outlook and our ability to execute Uh huh.
As Dominic mentioned in the pipeline is very strong, particularly as we're going into the second quarter with that said, though I think we're also realistic of the increase kind of macro uncertainty with the war rising rates as well, although we have no direct exposure to the war in Europe .
With that said and when we're modeling out when we also use multi scenario as far as looking at how we shared during our last call that we started this year. When we thought rates were going to increase 100 basis points and a deposit beta assumption for the full year of 30%. So we're definitely higher from that.
As we're modeling for the full.
Full year given rates are expected to increase a bit more than that and also related to that I would say that when we're looking on the asset side I think we're trying to be conservative as far as we're positive about the loan growth, but this type of this type of rising rate environment without any credit issues.
I think we're trying to be conservative about kind of any kind of spread.
That might be there with that said I just want to say you know we are starting this environment of rising rate environment from a position of strength best ever any slash record DDA, 43% of average deposits 45 at period end and then a low deposit under 80% and we've talked about.
Before we have operated and were comfortable operating up until a low nineties.
Okay, Great and then one for that.
Yeah, one thing I want to point out also at this that.
We normally east West Bank are normally.
Don't momentum more like in the third and fourth quarter and the first quarter normally I wouldn't call. It a struggle fourth quarter normally is.
So.
But this year I think we are in a much substantial better position, we have a very strong quarter and we feel that our pipeline in the second quarter looks pretty decent and so once you got two strong quarters in a row I'm pretty much we feel pretty good that.
For the rest of the year.
It's hard to not have strong financial performance.
Great.
Thank you for that I guess my follow up would be.
The debate it helps Irene.
Increase in betas, what are you assuming for deposit growth because we've seen some of your peers with commercial books have notable kind of chunky ines.
This quarter I was just wondering what you guys had double digit growth I'm just trying to.
Get a little bit more color on what you're assuming for deposit flows.
Yeah, we are not assuming the same level of deposit growth as we are on the loan side as we just talked about you know realistically. We don't think we need it and also realistically in this kind of environment. So the kind of deposit growth that we had in 2021 2020, probably not likely to occur. So we are expecting a.
Lower level of deposit growth, but still I would also comment that all our team leaders.
And our cash management sales team are all very busy bringing in and core deposits, which we expect to continue to grow from retail and commercial customers let.
Let me just also highlight that we are not the emphasize deposit growth. Despite the fact that we have you know this kind of loan to deposit ratio.
We are.
Getting all our frontline people to focus on.
Growing.
Deposit.
Core deposit we want every time every.
Any day, but what I'm looking at is that if you look at the deposit growth last year in fact, the last two years.
We actually.
Accommodate.
Our clients.
Excess liquidity quite a bit.
We really did not need that kind of deposit growth for the last two years, but these are good clients. They have tremendous excess liquidity and we are more than happy to accommodate them, but I just don't see that our clients will continue have this kind of excess liquidity. So we do expect that.
The deposit growth would take quite a bit from last year.
Yeah.
Our next question comes from Dave Rochester, with Compass point. Please go ahead.
Hey, good morning, guys nice quarter.
Thank you Sir.
I was wondering if you could just dig into the noninterest bearing deposit growth for the quarter that was exceptional.
And it is you guys had noted previously I guess, Greg Christopher noted previously.
Not many of your competitors were able to put up numbers like that this quarter.
On that trend. So just wondering is it primarily the treasury management guys efforts that are driving that or is there anything else that's driving that growth and then how are you thinking about that.
Going forward in <unk>, and then a follow up after that.
Yeah Yeah.
Anything really unusual as far as the nature of the deposit growth.
Some of our customers with the activity. They have you know honestly and their businesses your balances were up.
Especially compared to.
The average for the quarter, our point to point, nothing unusual or no industries or anything specific but as I mentioned the teams are hard at work, bringing in core deposits. So that's something we expect to continue.
Okay. So you are expecting to continue to see that but noninterest bearing growth remained pretty healthy here near term.
Maybe I'll clarify I definitely expect we will be bringing on more core deposits core deposits operating accounts and with that growing our.
DDA balances with that said you know there is a certain amount of liquidity.
That with the rising rate environment, you know made there may be disintermediation in to other asset classes other deposits and I think we're realistic about that but overall growing core deposits customers. That's something we're very positive about.
How are you guys thinking about using the earnings credit rate from here to keep that growth going in noninterest bearing.
Yeah, you don't certainly that's a factor for some of our clients are Dave you know the way that we look at it we're very practical that east west whether you pay on our interest expense our noninterest expense we view it the same way. So you know we don't look at that in a different way, we look at the economics of that.
Yep.
Okay. Thanks, guys.
Thank you.
Our next question comes from Jared Shaw with Wells Fargo. Please go ahead.
Hey, good morning. Thanks.
Shifting over to fee income are some really good strength, there and interest rate contracts and derivatives.
You know as well as just you know sort of overall, how should we be thinking about that was there anything unusual this quarter that.
<unk>.
Is unlikely to go and what I would guess it would be a good base going forward on that.
Yeah. That's a great question Omar will all there wasn't anything unusual I'll draw your attention to slide 17 of our DAC, but we break out the mark to market and that's not unusual but it fluctuate quarter over quarter.
Marked positive mark to market loss higher.
CVA adjustment, but aside from that.
From a core fee income perspective, FX wealth management, the IRC and the deposit accounts, we expect to continue to grow that year over year.
Okay. Thanks, and then on the securities portfolio.
It looks like a was that a re class of securities into held to maturity or are you actually buying you know a different a different product class two to start building that out and how should we be thinking about.
The breakdown of securities in the growth of that going forward. Yeah. Great question done during the quarter. In fact effective February 1st we transferred 3 billion are <unk> securities and the H D. N <unk> on a go forward basis, and just depending on the duration there may be.
The new Securities we purchased into held to maturity.
Quarter to date for the second quarter, Theres been a little bit but not significant.
So that mix I don't think it will change dramatically in the pace of them will buy into that depending on rates and depending on kind of our expectation around what's happening with that in our portfolio, we all buy more but probably at a lower level.
Okay.
Our next question comes from Casey Haire with Jefferies. Please go ahead.
Yeah. Thanks, Good morning, everyone. I mean, maybe just following up on that question I'm I'm a.
On the Securities book is there an appetite to maybe run that that securities portfolio are lower as a percentage of earning assets.
Potentially fund some of those loan growth going forward from there.
Yeah, absolutely I think that is something we would evaluate just kind of depending on kind of what the spreads that we're earning and what makes sense as far as our overall balance sheet.
As you know we generally look at the Securities book relates to make sure that we have enough liquidity.
And we're not necessarily trying to balloon that out, but certainly with the rising rate environment and this is something that we're having more discussions with our Alco committee as well as far as what the right mixes.
Yeah.
Okay, very good and just.
Following up on the loan growth.
You know you guys are off to a very strong start you know, 20% linked quarter annualized with C&I commitments up 20%, which is <unk>.
Very positive leading indicator I'm on the potential growth near term I know, there's obviously a lot of visibility into the fourth quarter, but just wondering why that why the loan growth guide isn't a little bit stronger than that mid teens levels. It just general conservatism or do you see something more substantial to slow down the loan.
Growth going forward.
Well I think as we said earlier.
We are.
We looked at where we are today you know we are very pleased at the fourth quarter momentum continuous spilled over in the first quarter and then looking at second quarter.
Still got a lot of legs going I mean, so that's all good and then what I like most about it is that.
It's coming from all different sectors. So you know this whole thing that we worked so hard for the last 10 years to get more granular to more diversified portfolio.
<unk> is working exactly what we plan to you know almost a decade ago.
So multiple engines are all producing and then you know we always looked at it and one particular.
Period of time, maybe a few of them, we'd do better than the others. No and then it's everything is kind of even out but well. It just happened that the last two or three quarters in a row that we actually have modal factors motorboat.
Units all.
All going strong now that said you know as I said earlier.
We have you know.
Inflation.
Today that is at a somewhat of a unprecedented situation for the last decade or two.
And then we also have yeah.
This war going on between Russia, and Ukraine, which while I said that we will have no bearing to east West Bank business. The fact is it is.
<unk>.
Clearly effect of macro economic environment.
And so when we start looking at all these different things and the pandemic is not over yet.
We do need to have to be realistic about.
To what extent, how would interest rates spike by the fed.
Would have.
Effect.
For example.
D residential.
Market.
And to that extent.
But at some point of time.
Right got high enough that make it not likely.
For people to do transactions. So we will look we take that into effect and I would say that.
I don't want it to get.
Too overly excited about well just because its momentum going so strong now.
That maybe by the fourth quarter.
Wooster, you seeing that kind of momentum now I do have one way to look at it from a positive note is that when there's maybe less mortgage origination for single family.
There is less pay down too so net net you know.
The growth rate may not be that negatively impacted even with a rate hike.
Same thing for commercial real estate, we're not going to originate as many.
CRE I would think in the.
Second half of this year.
However, there'll be less pay down so net net our local may still be very strong.
But that what we hold the direction, it's going to be but without having a lot of clarity about the.
Interest rates Spike impact.
How exactly does.
Russia, Ukraine situation with debartolo and to what extent.
Effect.
<unk>.
Overall global supply chain and how pandemic would actually continue to have new variants coming out all of that if we start looking at it I do feel that we wanted to make sure we're being prudent.
Two project the <unk>.
Second half or do you.
Our next question comes from Brandon King with Truth Securities. Please go ahead.
Hey, I had a few questions on loan growth I mean, if somebody here since may has been implied in some previous answers but.
With C&I utilization, increasing in the first quarter.
What is implied in the guidance as far as where that utilization level stays in the near term.
We assume that utilization stay around the same we have not sort of like.
Put any additional you know it well.
And the utilization rate to take to get the assumption of all of our outlook.
Okay.
And then inside your number one for that growth and then but it is also just 1% one 1%.
I know a lot of a lot of other banks are seeing utilization growth. So I'm just wondering if there's any potential upside there.
I think that is all the power we lap right, we're going to be able to grow without utilization increases in that.
Got it.
Got it got it.
And then for CRE I was strong as well I wanted to know how much of the growth in the first quarter, how much of that was attributed to slower paydowns.
There definitely was a decrease in paydowns in the first quarter, especially compared to if you look at like the back half of last year, but I would also say we had increase origination so the combination of both bandwidth.
Okay.
Our next question comes from Brock Vandervliet with UBS. Please go ahead.
Hey, everyone nice to be loss Abraham for Brock.
Just wanted to dig into rising mortgage for a minute I mean I get that your business model is different than most.
But even given that the origination volume seems pretty resilient here just flat year over year. When most of you know most competitors are down.
Is there a share gain happening there is it is there any other color you can offer around that.
Well actually relatively speaking.
I mean, if you recall going back to our earnings release for the last few years residential mortgage always that the leading oh.
The leading category in terms of our loan growth always outgrew.
CRE or C&I for the last two years and actually two quarters in a row residential mortgages are falling behind compared to the other two relatively relatively speaking.
And which is obviously by nature you look at the external environment.
We expect our residential mortgage growth will continue to be more challenging.
As you looked at it we used to have like 20 plus percent growth a couple of years ago.
Were down to 11% in the first quarter and we expect it to.
The second quarter, maybe down even a little bit more.
And then I would expect that even by the fourth quarter, maybe down to single digits you know.
So that's the way I looked at it is that.
The external environment and make the refinancing.
Very challenging and it may also discourage.
Homebuyers to purchase home when rates spiked to over five or so rate of over 5%. It would be you know like when it got to even 6% or something he was going to be very discouraging for homebuyers by homes. So the likelihood that we do a lot of Rosie.
Refi or purchases.
Slow now that set aside.
As I just said earlier.
Pay down will drop substantially because for the last few years.
We just turned a lot of the loans.
Origination and high volume, we also have pay down in the high volume simply because many of our existing customers as refinancing their mortgages for a lower rate.
And we're just doing a bunch of work for the same net number.
So I looked at it in 2022 particular, the latter half of the year.
I would say that the origination volumes should drop.
Substantially however, the pay down also with dropped substantially hopefully we'll still have some net.
Net growth, but we were pretty much expect that in 2022.
Georgia.
Loan growth will be coming from C&I, and CRE and less so from single family mortgages.
Okay, that's very helpful.
As my follow up and maybe a slightly bigger picture question.
Its rate hikes, a rate hike cycle is.
Barely started and you know in the efficiency ratio and east to West.
Already it looks to already be below where where it was when the last.
Michael was well underway. So just wanted it to be.
You could help US understand just you know what may have changed in the profile here, that's helping you guys achieved such stellar efficiency.
And maybe even a sense of how how low it could it could reasonably go overtime.
Thanks.
Well, we never manage the bank.
Two the efficiency ratio I think that's something that we'd made clear on these calls.
And that certainly isn't something that's in any of our metrics our drivers, but with that said and also related to that we have continued to make the investments that we think are appropriate for the bank for our clients for our strategy and I think those can.
<unk> investments.
Successful investment are part of the reason our efficiencies while if you look at it the other side of it really is if you look at our balance sheet and the composition now simply we're well positioned right now for a rising rate environment credit is also very benign, although honestly not factor into the efficiency ratio, but nonetheless. The addition.
What kind of operating costs related to a credit cycle or not here. So I think it's the combination of all of these factors.
But certainly that's something that will.
We will be very important for us as we go forward. We continue to make the investments that we think are appropriate and then also reap the reward on the revenue side.
Our next question comes from Gary Tenner with D. A Davidson. Please go ahead.
Thanks, Good morning.
My questions have largely been asked and answered, but just regarding the guide on the provision expense.
Is that does that increase purely a function of the higher loan growth guide for the full year or any other factors any changes to the seasonal model that are dragging a number any harder.
Yeah, Great question, it's largely a function of the higher loan growth Gary.
And also you know as you know we run Maltese scenario as far as far simple calculation, so just evaluating that and with a little bit of the uncertainty for the future with that said and I said I think I said in our prepared remarks.
Credit quality is very benign continues to be and that's our expectation for the full year.
Thank you.
Our next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Hey, good morning.
First question just on the trade finance portfolio can you just remind us how big that portfolio is at the end of the first quarter and how that.
Portfolio has performed from a growth perspective.
The supply chain disruption free.
Freeing up to some degree.
Well in terms of that portfolio I think that is going I was just going fine I mean, we have not have much.
For the last four years, we have not had much growth in that portfolio I mean naturally so.
So on the trade finance preferred perspective, I mean, there's a couple of reasons one is that.
The trade tariff plus.
The pandemic that affect the supply chain.
And also we have to recognize that the international.
Ill.
Trade finance business, it's really.
Something I would say is more or less like the older business model.
With the advances in technology, we have less and less of that.
Don't require the traditional international trade finance that.
From banks, you know a lot of the payments.
Today.
Danny electronically.
Much easier and faster so we at East West Bank actually while we are actively involved with the cross border banking business a lot of our cross border banking business accurate.
With some e-commerce and then too.
Digital media and entertainment business and private equity business and then most of those business.
There are cross border elements, but not necessarily require us to provide a letter of credit support and so forth. Yeah. So that's why we are but the business still going solid and I don't know Irene do you have any numbers that you wanted to ship.
Yeah quarter over quarter, we are up in trade finance, that's partially I think seasonal what they are about $500 million.
Okay.
Okay, that's about flat not up about 500.
Just to clarify, yes, we're up about 24%.
The balance was 500 million. Thank you julianna.
Okay. Thank you and then just a housekeeping item I think you gave us the amortization expense for the upcoming quarter at $37 million how should we.
Modeled after the full year.
Okay.
Ah so map for the second quarter, we gave me the $37 million and then if you look in our slide deck on the outlook Slide. We also provide for you our expectations for the full year amortization.
Amortization expense.
And the range of a $110 million to $125 million and it's a range because it kind of depends on when projects closer to go into service and kind of the mix of the projects. So I would say is that take that second half of the year and at this point probably split it evenly between the two quarters.
Our next question is a follow up from Chris Mcgratty <unk>. Please go ahead.
Oh, great. Thanks.
I agree and I just wanted to go back a little bit to the efficiency question before and I'm not sure. If it's a it's a matter of.
Operating leverage spread to revenue.
But is there a floor, where you would be uncomfortable running the efficiency ratio.
We don't have a floor.
Yeah.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Dominic <unk> for any closing remarks.
Well. Thank you all for joining our call and I am looking forward to speaking to all of you again in July .
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.